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Corporate Risk Management under Information Asymmetry
Author(s) -
Choi Jongmoo Jay,
Mao Connie X.,
Upadhyay Arun D.
Publication year - 2013
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/jbfa.12008
Subject(s) - information asymmetry , endogeneity , economics , value (mathematics) , investment (military) , commodity , enterprise value , financial economics , risk management , work (physics) , business , actuarial science , econometrics , microeconomics , finance , computer science , machine learning , politics , political science , law , mechanical engineering , engineering
This paper examines the financial and operational hedging activities of US pharmaceutical and biotech firms that are subject to a high level of information asymmetry stemming from R&D investments during 2001–2006. We find evidence in support of the information asymmetry hypothesis à la Froot, Scharfstein and Stein (1993) that hedging helps mitigate the under‐investment problem. Specifically, we find that the use of financial derivatives is associated with greater firm value and that the value enhancement is larger for firms subject to greater information asymmetry and better growth opportunities. There is a synergy between financial hedging and operational hedging where the latter is used to counter product development risk. The results are robust with respect to alternative performance measures, industry‐specific growth measures, and the endogeneity problem. Our work is differentiated from existing studies that examined commodity‐based industries without addressing information asymmetry.